With the help of following information calculate provisions for bad and doubtful debts
Debtors M: Rs. 3,200 Bad to be written off
Debtors N: Rs. 8,000 expeected to realise only 70%
Debtors O: Rs. 6,000 expected to realise only 60%
Debtors P: Rs. 4,000 financial condition very poor, no recovery is likely
A. Rs. 8,800
B. Rs. 12,000
C. Rs. 4,800
D. Rs. 4,000
Answer: Option B
Solution (By Examveda Team)
InterpretationThe phrase “provision for bad and doubtful debts” requires recognising the entire expected loss from debtors: amounts already identified as bad (to be written off) plus the doubtful portions that are not expected to be recovered
Loss computation debtor-wise
Debtor M: ₹3,200 is bad ⇒ 100% loss = ₹3,200
Debtor N: Expected to realise 70% of ₹8,000 ⇒ loss = 30% × 8,000 = ₹2,400
Debtor O: Expected to realise 60% of ₹6,000 ⇒ loss = 40% × 6,000 = ₹2,400
Debtor P: Financial condition very poor, no recovery ⇒ 100% loss = ₹4,000
Total provision (bad + doubtful)
₹3,200 + ₹2,400 + ₹2,400 + ₹4,000 = ₹12,000
Note
If the requirement were only for a provision against doubtful debts (excluding specific bad debts already written off), it would be ₹2,400 + ₹2,400 = ₹4,800. However, the wording includes both bad and doubtful, so the correct option is ₹12,000
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To calculate the provision for bad and doubtful debts, we need to estimate the amount that is unlikely to be recovered from each debtor based on the provided information. Calculation of Provision for Bad and Doubtful Debts: Debtors M: Rs. 3,200 Bad to be written offThis amount is considered a definite bad debt, so the full amount needs to be provided for.Provision for Debtors M = Rs. 3,200Debtors N: Rs. 8,000 expected to realize only 70%This means 30% of the amount is doubtful.Doubtful amount for Debtors N = Rs. 8,000 ( imes ) (100% - 70%) = Rs. 8,000 ( imes ) 30% = Rs. 2,400Debtors O: Rs. 6,000 expected to realize only 60%This means 40% of the amount is doubtful.Doubtful amount for Debtors O = Rs. 6,000 ( imes ) (100% - 60%) = Rs. 6,000 ( imes ) 40% = Rs. 2,400Debtors P: Rs. 4,000 financial condition very poor, no recovery is likelyThis amount is considered a definite bad debt, similar to Debtors M, so the full amount needs to be provided for.Provision for Debtors P = Rs. 4,000 Total Provision for Bad and Doubtful Debts: Sum of provisions for all debtors = Provision for Debtors M + Doubtful amount for Debtors N + Doubtful amount for Debtors O + Provision for Debtors PTotal Provision = Rs. 3,200 + Rs. 2,400 + Rs. 2,400 + Rs. 4,000 = Rs. 12,000 Therefore, the total provision for bad and doubtful debts is Rs. 12,000. The correct answer is B. Rs. 12,000.
Here we just take those types of amounts which we cannot received from debtors.
So, we take firstly, 70% of 8000 is 5600. and then we less it from 8000-5600=2400 is not receivable from Debtor N. Secondly, we take 60% of 6000 is 3600, then we less it from 6000-3600=2400 is also not receivable from Debtor O, and lastly Debtor P whole amount 4000 is not receivable.
Then we add the amount which not receivable by the above Debtors are as:
Debtor N = 2400
Debtor O = 2400
Debtor P = 4000
Here the total of above Debtors are = 8800 So the answer is right.